An American investment analyst has used the Motley Fool online city column to give a glowing endorsement to one of the UK’s publicly quoted property firms, saying it is the only UK property stock he would ever own.
Ian Pierce, one of a number of analysts to co-author the Motley Fool column, gives full-blooded backing to Rightmove, and says that despite its current “pricey” share value, this is justified because of its dominant market share, the difficulty of entering the portal market for competitors and because it is “a fantastically well-run, co-founder-led business.”
The Motley Fool issues a series of investment newsletters to subscribers in the UK and in other countries; the newsletters are individually-authored and do not represent a ‘corporate’ view from the US-based company, but have nonetheless earned respect amongst some sections of the investment community.
In his latest newsletter Pierce - an American based in the UK - says his background leads him to be naturally sceptical about property stocks, because they are typically “cyclical, often highly-leveraged and unlikely to deliver the same long-term returns as companies with more stable income.”
However, he believes Rightmove confounds such scepticism because of its dominant role over what Pierce calls major competitors, such as Zoopla, and smaller options, such as OnTheMarket.
“Rightmove’s 77 per cent market share is more than triple that of its nearest rival. And this dominant position is virtually untouchable as more visitors to the site forces more agents to list their properties there, which then leads to more visitors because the site offers the widest selection of properties” he says, summing up the British portal landscape.
He goes on to say what effect this has.
“It means agents are unlikely to switch to a competitor even during a downturn. And, since agents pay a flat monthly fee rather than per listing, even a decrease in the number of homes for sale wouldn’t wreck Rightmove’s business model. This, of course, makes Rightmove far less cyclical than estate agents or housebuilders.”
In addition, Rightmove’s dominance gives it incredible pricing power.
“In the first six months of 2016 the average revenue per agent rose 12 per cent year-on-year to £830 per month. And, the combination of charging high prices and running an asset-light business means margins are through the roof. In the same period Rightmove’s operating margins rose to an astonishing 74.6 per cent” Pierce writes.
As a result of this profitability and low capital expenditure “Rightmove can return bundles of cash to shareholders”, Pierce claims, pointing out that of the £80.6m of pre-tax profits recorded in the six months to June 2016, some £66m was returned to shareholders through dividends and buybacks.
“And even after these major cash outflows the company still maintained a very healthy £13.3m of cash on hand at period-end” he adds.